Video: Market Coach Doug Hirschhorn discusses how the world's best traders make their decisions and what they can do to fight off their own "Lizard Brain" emotions.
Have you ever wondered what the great traders do that you don’t? The answer is pretty simple. They make decisions based on simple math, rather than with their "lizard brain" emotions. Let me give you an example of what that means.
Suppose I told you that you had a 94 percent chance to win at a particular game? Would you play that game?
Most people would say, "Yeah, of course."
Great. Every time you win, I’ll give you $1, and every time you lose, you have to give me $1000. Even though you may be "right" more often than you’re "wrong," you’ll still lose money over time.
Let’s flip it around. Suppose I told you that you had a 6 percent chance to win at some game. Would you play that game? Hopefully now your answer is, "Well, it depends on how much I make when I’m right and how much I lose when I’m wrong."
If you’re thinking that way, you’re thinking like a great trader because great traders make trading decisions based on the math instead of emotions. That means they look at the probabilities of getting a trade right and how much money they’ll make vs. how much money they’ll lose if they’re wrong.
If the combination of those two things results in a positive expected value, then they commit to doing the trade. And not because they want to, but because the math tells them they have to.
Think better, invest smarter.
Doug Hirschhorn is the chief executive officer of Edge Consulting, a firm specializing in “Peak Performance Coaching.” He holds a Ph.D. in Psychology with a specialization in sport psychology, and has offices in New York and South Florida. His client list includes elite athletes as well as many of the largest banks, hedge funds and financial institutions in the world. Doug's new book, 8 Ways to Great (Putnam, 2009) is currently available on Amazon.com for $19.95.
Have a question for Doug? You can reach him through his Web site, DrDoug.com
Disclaimer: Doug Hirschhorn's expertise is in the psychology of achieving peak performance. He is not a financial advisor and does not make trading or investment recommendations or provide trading or investment advice. He is an expert on the mental game. Although Doug Hirschhorn has a Ph.D. in Psychology with a specialization in sport psychology, he is not a licensed psychologist and does not provide therapeutic, clinical or counseling services.